The Only Investing Decisions That Matter

One of the risks of being a personal finance blogger is getting ahead of your (readers’) skis.

It’s very easy to go down yet another investing rabbit hole, exploring advanced asset allocation strategies or exploiting yet another niche tax strategy.

It may be fun (at least for people like me) and intellectually challenging – but the reality is that the incremental returns you achieve are marginal at best.

In fact, I’d say that it’s the first 10% of the investing “effort” that will take you 90% of the way to getting rich.

All you need to do is answer the six basic questions below.

Then, set your strategy on autopilot and go back to living (and enjoying) life – because your success as an investor is pretty much guaranteed.

#1: Do You Invest In The First Place?

Let’s start with the most important decision of all – and given you are reading this blog, I hope it’s pretty much a bygone conclusion.

Whether it’s protecting your hard-earned money from inflation, the desire to have your money make more money than you, becoming a millionaire, or even losing your job, there are many reasons to invest in productive, income-generating assets.

And if you think you are too old to start investing, think again.  There are plenty of ways to build wealth in both your 40s and your 50s.

In other words, it’s never too late – you just need to make up your mind.

#2: How Much Do You Invest?

The usual mantra in the personal finance community is to “minimize spending, maximize investing”.

If you are solving for the largest nest egg in the shortest possible period of time, this will definitely do the trick.

But if you are solving for actually living an enjoyable, rewarding life, this advice misses the mark entirely.

There are plenty of reasons to spend money today as opposed to tomorrow.

Besides, very few folks can sustain extreme savings rates over long periods of time.  Willpower only lasts so long, and chances are your family members might not be as motivated as you.

A much more effective approach is to find a savings rate that works for you – even if it’s just 10% or 20% – and stick with it for a long period of time.

Then, every time you get a raise, earmark 50% of it for spending – and save the other 50%.

Given a long enough time frame, your savings rate will eventually tick up to about 50%, and you won’t ever feel like you’ve ever deprived yourself.

#3: Do You Go Active or Passive?

Once again, no need to be overly dogmatic here.

Yes, there is rock-solid evidence passive investing trumps active money management, no matter what silly things active investors may say.

Still, there are people that beat the market, year after year – and by a large margin.

If you are convinced that you are one of the chosen ones – or just want to try your luck, simply allocate a small (~10%) of your portfolio to active investing, while leaving everything else in a passive fund.

If you are really so good at investing, that actively managed part of your portfolio will soon dwarf your passive investments – and you will retire far earlier than expected, most likely on a nice private island.

Problem solved.

And if not, you’ll still be on track for a comfortable retirement, thanks to those good old boring index funds.

#4: Deferred vs Taxable?

If you are new to investing, this may sound a bit intimidating – but it really shouldn’t.

The bottom line is that the government wants you to save for retirement, so it doesn’t have to pay your way through old age.

In order to incentivize you to do so, it provides various tax breaks if you promise not to touch your money until you are older.

Cue in plans like the 401(k) in the US, RRSPs in Canada, or workplace pensions and Lifetime ISAs in the UK. These are all deferred investing vehicles.

Then there are taxable accounts.  Here, you don’t get a tax break on the money that goes in – but you can tap that account any time you like, whether it’s to fund early retirement or buy yourself a nice car.

Your regular brokerage would fall into this category.

The decision between deferred vs. taxable accounts should boil down to one question only:

Do you have enough saved up for retirement?

If not, you want to take advantage of the tax breaks until you are in a place where you can comfortably retire by 55 or 60.

Once you get to that place, you can start thinking about the promised land of early retirement – and channel more money into your taxable accounts.

#5: Stocks vs Bonds vs Real Estate

Notwithstanding all the noise out there, retail investors like you and I should have the vast (i.e. 90%+) portion of our investments in one of the three asset classes above.

Real estate is a great way to get rich but it comes with its own challenges.

While I personally scored a couple of home runs here, I’ll be the first one to say that direct real estate is about as “passive” as owning a young puppy (and I’m probably being unfair to puppies here).

That leaves stocks vs bonds.

Owning more bonds will make your portfolio less volatile, but it will also eat into your returns:

Once again, the trick here is to find an allocation that works for you over the long run.

It’s MUCH better to own a 50-50 portfolio that you can hold through thick and thin than go for a 100% equity portfolio that you will liquidate every time the market wobbles – and eviscerate your returns along the way:

In investing, you need to solve for longevity – because it trumps EVERY other factor out there.

#6: US vs International

This is the last investing decision you need to make.

Once you’ve figured out your equity allocation, do you put it all in US stocks or opt for a balanced portfolio of global equities?

Again, the trade-off here is quite simple.

Over long periods of time, US equities tend to deliver higher returns (caveat: the past does not predict the future).

Global equities, on the other hand, have lower returns – but provide more insulation against periods when US equities underperform, like that lost decade during the noughties.

I have a strong bias toward US equities which I think is well-supported by data.  However, there’s absolutely nothing wrong with buying yourself a nice world tracker and benefitting from humanity’s progress as a whole.

And that’s… it.

The problem with the money management industry is that if they told you things were that simple, you’d never pay them the egregious fees they want to charge you.

Thus, they choose to overcomplicate and obfuscate, putting unnecessary barriers between you and the kind of life you want to live.

But at the end of the day, investing is simple.  It’s not easy, but it’s simple – and your journey to wealth begins with the six simple questions above.

As always, thank you for reading – and happy investing.